Carolin Pflueger and co-authors · Odd Lots · Why Treasuries Are 'Risky' Again
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Measured the market’s perceived policy reaction function by regressing forecasted Fed funds rates on forecasted inflation and output from a panel of 30-50 professional forecasters
“You can run this regression of how much do yields change onto what's the inflation surprise on that day… gives another way of getting a perceived reaction function.”
“The perceived reaction function that we saw at that time was extremely flat… even in May 2021 a half-percent inflation surprise… the two-year rate didn't move.”
“I don't think you should shy away from it… if you're not forecasting them, you're at the whim of the market to price them correctly.”
“We're actually doing our budgets every six months right now, and it's working. Keep the monthly forecast.”
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